Is Fiscal Policy More Effective During Cyclical Downturns?

Georgios Karras

International Economic Journal, 2014, vol. 28, issue 2, 255-271

Abstract: Using a panel data set of 61 countries for the 1952-2007 period, the paper shows that fiscal policy is more potent during downturns than during expansions, and that the difference is substantial: the fiscal multiplier is twice as large when output is below its long-term trend. In particular, the empirical results suggest that during expansions the output 'multiplier' is less than one, private consumption is crowded out, and the response of investment is weak; whereas during downturns the output multiplier is greater than one, private consumption is not crowded out, and the response of investment is strong. Differences between expansion and downturn multipliers are found to be greater in low-income countries.

Date: 2014
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DOI: 10.1080/10168737.2013.825304

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